Thomas Malthus
William Jevons
Samuel Bailey
Adam
Smith
David Ricardo
“value is a physical property of objects”
Karl Marx
Leon Walras
“value is in your mind”

1) Competitive markets tend toward an efficient
(Pareto-optimal) allocation of resources.
2) A Pareto-optimal distribution of resources can be reached no matter what the initial distribution of resources.
• Expressed as a mathematical equation as the
Arrow-Debreu Hypothesis in 1953.
• Also compatible with Kaldor-Hicks optimality

1. State or collective-based interference in individual expression of preferences
2. Lack of perfect information about how a transaction will affect your utility
3. Transacting goods that are not fully
“ownable”. Public goods are:
– Non-excludable
– Non-rival

“We estimated that at the current margin, ecosystems provide at least US$33 trillion dollars worth of services annually. … the total range of annual values we estimated were from US$16–$54 trillion.”
Costanza et al, 1997
“… there is little that can usefully be done with a serious underestimate of infinity.”
Toman, 1998

Ludwig von Mises Milton Friedman Friedrich Hayek John von Neumann
“…it does not matter whether the economic system is named capitalist or socialist. It all amounts to whether the pricing policy is based on marginalist principals, which will lead to the optimum allocation of resources.”
Tjalling Koopmans, 1945

“We shall suppose that the individual in making these decisions acts as if he were pursuing and attempting to maximize a single end.”
--Milton Friedman
“One day I would be measuring a secretary to estimate how many square feet of target a seated pilot made, and a short time later I would be gravely discussing that number with another research group. Just remember that the next time you encounter a Chicago paper on the economics of suicide, or cigarette addiction, or the ‘economics of the family,’ or the trajectory of optimum saving over the life cycle. You don’t need combat experience to sell yourself as an expert on war.”
--George Stigler

• Civil projects in France, 1820s
• 308 Reports
• 1936 Flood Control Act required Congress not to fund any project that had not been subjected to CBA.
• Flood Control Act of 1939: required that "the benefits to whomever they accrue [be] in excess of the estimated costs”.

“The Congress authorizes and directs that… all agencies of the Federal Government shall… identify and develop methods and procedures… which will insure that presently unquantified environmental amenities and values may be given appropriate consideration in decisionmaking along with economic and technical considerations;”

(b) Regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society;…
(d) …each preliminary and final Regulatory Impact Analysis shall contain the following information:
(1) A description of the potential benefits of the rule, including any beneficial effects that cannot be quantified in monetary terms, and the identification of those likely to receive the benefits;
(2) A description of the potential costs of the rule, including any adverse effects that cannot be quantified in monetary terms, and the identification of those likely to bear the costs;

• Option Value: what is the value of foregone development options?
• Hedonic Analysis: does it improve the value of actual transactions? (“revealed preference”)
• Elicited Value: WTP and WTA
• Benefits Transfer: how much are other similar environments worth?
• Production Function: how valuable are the things that it makes?
• Replacement Cost: how much would it cost to use technology to perform the same services?

• 1960s: “ Small planet ” Malthusian thinking
• “The Tragedy of the Commons”, 1968
• “ Lifeboat Ethics: The case against helping the poor ” 1974
• Answer: Privatization?
• Elinor Ostrom: Common Property Regimes

C&C v. Coase
• Command and Control: The government says
“you shall go to any and all expense to avoid polluting beyond a dangerous level”.
• Coasian bargaining: The government distributes the rights (people have a right not to breathe bad air). Therefore the corporation can pay people a market price for the right to pollute the air.
– The least-cost solution is adopted, and interests of the company and the people are balanced

“Whether the $3 is a payment which the cattleraiser has to make if he adds the third steer to his herd (which it would be if the cattle-raiser was liable to the farmer for damage caused to the crop) or whether it is a sum of money which he would have received if he did not keep a third steer (which it would be if the cattle-raiser was not liable to the farmer for damage cause to the crop) does not effect the final result.”
Ronald Coase, 1960

“The rights should be for one year only , the price of one right for one year representing the annual rental value of the water for waste disposal purposes. (There is no reason, though, why speculators should not gamble in one year on the price of rights in later years.)”
JH Dales, 1968

• 1952 Presidential Commission
• Incubator for market-led policy
• Link between academic economics and DC policy circles
• Many ideas put into practice after 1980 election of Reagan

“ We are preparing to finalize a new ‘emission banking’ policy which will establish clearly that clean air (or conversely, the right to use it) has direct economic value. … This policy could be the forerunner of a futures market for air pollution rights.
”
Doug Costle, EPA Administrator, 1979

“Green GDP deducts ecological and environmental losses. It is able to more fully test and measure the quality of economic development and avoid false achievements.”
-- Pan Yue, China Vice-Minister for Environment
“It is possible for scientists to estimate green GDP. … by 2015,
India’s GDP numbers will be adjusted with economic costs of environmental degradation.”
-- Jairam Ramesh, India Minister for Environment

• Equimarginality: each dollar spent on conservation should return at least a dollars worth of Natural Capital
"The world's ecosystems are capital assets.”
Daily et al. (2000), Science

$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002

Composition of Available Credits, Entrepreneurial Wetland Banking Industry,
Chicago Dictrict COE, 1994-2002
140
120
100
Dat a: Chicago COE and bankers. Copyright 2004 M organ M . Robert son, mmrobert son@wisc.edu
4/ 04
Certified Credits
Planting Approved
Hydrology Approved
Presale Approved
80
60
40
20
0
Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
-20

… components of nature, directly enjoyed, consumed, or used to yield human well-being.
(Boyd 2006)
… the conditions and processes through which natural ecosystems, and the species that make them up, sustain and fulfill human life.
(Daily 1997)
… the benefits people obtain from ecosystems.
(Millennium
Ecosystem Assessment, 2005)
… the observable manifestations of ecosystem processes such as nutrient recycling, regulation of climate, and maintenance of biodiversity.
(National Academy of Sciences, 2005)
… a framework to measure nature's contribution to human well-being.
(Karieva, 2009)

Parametrix, Inc., 2010. An introduction to EcoMetrix: Measuring change in ecosystem performance at a site scale , p.9.

From: Fox, J. 2011. U.S. National Opinion Survey on Stacking Environmental
Credits: Definition, Status, and Predictions of Wetland, Species, Carbon, and
Water Quality Credit Stacking. Palo Alto, CA: EPRI.
http://my.epri.com/portal/server.pt?open=512&objID=423&&PageID=235467&mode=2&in_hi_userid=230564&cached=true

“The world of zero transactions costs has often been described as a
Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave. … In my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics.”
Ronald Coase, 1988